Retirement Terms Flashcards
Tax-Deferred:
You pay taxes in future when income is lowered (in retirement) and you’re in a lower tax bracket. It avoids you having to pay money during peak working income years.
IRA:
Individual Retirement Account - personal retirement plan set-up by you. Comes with tax benefits and types qualified for depends on job and how much money you make. There are restrictions on how much money you can contribute within a year and you may be penalized if withdrawing money before age 59 1/2.
If you qualify for a tax deduction, the amount you add to your traditional IRA (tax-deferred) will be deducted from your total income which means you’ll pay less money to IRS.
Roth IRA:
Almost exact opposite of traditional IRA. Money is added
post-tax and when you begin using funds at retirement then you won’t have to pay taxes. You can also use the money before 59 1/2 if reason for doing so qualifies (ex. 1st time home).
Usually only available for low income thresholds.
SEP-IRA:
SEP (Simplified Employee Pension) IRA’s are retirement accounts for SMALL BUSINESS OWNERS, ENTREPRENEURS and SELF-EMPLOYED people. Only employers can make contributions. SEP-IRA’s are tax-deferred and let you contribute more money (up to 53K or 25% of income) than you would normally be able to contribute through other IRA accounts.
(408 k) is a SEP plan.
SIMPLE IRA:
The Savings Incentive Match PLan for Employees (SIMPLE) IRA is a tax-deferred plan for SELF EMPLOYED INDIVIDUALS and SMALL BUSINESS OWNERS that’s automatically tax deductible. Contributions can come from both employees and employers, and employers must add money to this retirement account even if their employees fail to set aside funds.
(408 p) is a SIMPLE plan.
401(k) Plan:
Many companies offer 401(k) retirement plans. With traditional 401(k) plans you can contribute a certain percentage of your paycheck before taxes. Much like traditional IRA’s, you’ll owe income taxes when you retire and move money from your account. Prior to retirement, you won’t pay as much money in taxes because contributing to a traditional 401(k) reduces your taxable income. On the other hand, Roth 401(k) plans mimic Roth IRA’s - you’re using taxed income upfront, so you don’t have to pay any taxes when you withdraw it in retirement.
Annuity:
An annuity is an investment resulting in regular payments from an insurance company that can be a retirement saving strategy. Insurance companies may pay you back immediately (immediate annuities) or over the course of multiple years as your tax-deferred investment grows from interest (deferred annuities). Annuities may take the form of bonds earning a fixed interest rate or they can be a mixture of investments that earn interest based on the market.
Defined Benefit Plan:
Defined Benefit Plan: Offers a set benefit amount to an employee when he or she retires based on factors such as income and the number of years served at a company. Defined benefit plans, such as pensions, are funded almost entirely by employers. 501 c is a pension plan.
This differs from Defined Compensation Plan in which the employees also contribute along with the employer in plans like a 401 (k).
Defined Contribution Plan:
Defined Contribution Plan: Employees and employers make scheduled payments toward defined contribution plans, like a 401(k). When the employee retires, his or her benefit package depends on its return or investment.
This differs from Defined Benefit Plans, such as pensions, which are funded almost entirely by employers.
Vesting:
Vesting: is ownership. Vesting refers to the money in your plan that actually belongs to you rather than your employer. Your employer may have a program where he or she matches the dollar amount that you’ve reserved for retirement, but your employers money won’t automatically be yours. If this is the case, you’ll likely have a vesting schedule that show how long you’ll have to work at the company before you’re fully vested. Your goal is to become fully vested so that you own 100% of your retirement funds.
403(b):
403(b): These plans are only offered to public school employees, certain ministries, medical professionals, librarians and employees of tax-exempt organizations, while 401(k)s are available to employees of for-profit companies.
Eligibility Requirements - Only non-profit and government employees may have a 403(b).
- usually have higher management fees.
- Usually have slightly higher contribution limits.
- employer matching may vary from the 401(k).
- usually have shorter vesting schedules.
- offers extra catch-up contributions for employees that have worked for the same employer (usually 15 yrs) to contribute up to 3,000 in additional funds per year to their accounts.
- some drawbacks may be fewer investment choices, possibly higher fees, penalties on early withdrawals, and not always subject to ERISA ( Employee Retirement Income Security Act - which protects employees) which is not necessarily a bad plan.
401(k) vs. 403(b) practical differences:
401(k) vs. 403(b) practical differences: Even though employers are able to provide employee-matches to their participants’ contributions, most employers are unwilling to offer matches so they do not lose ERISA exemption.
Consequently, 401(k) plans offer match programs at a far higher rate. However, if an employee has over 15 yrs service with certain nonprofits or government agencies, they may be able to make additional catch-up contributions to their 403(b) plans that those with 401(k) plans can’t.
Another difference between 401(k) and 403(b) plans is that for non-ERISA 403(b) plans, expense ratios can be much lower since they are subject to less stringent reporting requirements.
Typically, the plan providers and administrators are different for each type of plan. Notably, 401(k) plans tend to be administrated by mutual fund companies, while 403(b) plans are more often administrated by insurance companies. This is one reason why many 403(b) plans limit investment options and prominently feature annuities, while 401(k) plans tend to offer a lot of mutual funds.
Bottom line is they are very similar.
Mutual Fund:
Mutual Fund: Type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
Stock:
Stock: Also known as equity, stocks are a security that represents the ownership of a fraction of the corporation. Units of stocks are called “shares”.
Bond:
Bond: a bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debt-holders, or creditors, of the issuer. Bond details include the end date when the principle of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments made by the borrower.
Issuers of bonds - Governments (at all levels) and corporations commonly use bonds in order to borrow money. Governments need to fund roads, schools, dams, or other infrastructure. The sudden expense of war may also demand the need to raise funds.
Similarly, corporations will often borrow to grow their business, to buy property and equipment, to undertake profitable projects, for research or development or to hire employees. The problem large organizations run into is that they typically need far more money than the average bank can provide. Bonds provide a solution by allowing many individual investors to assume the role of the lender. Indeed, public debt markets let thousands of investors each lend a portion of the capital needed. Moreover, markets allow lenders to sell their bonds to other investors or to buy bonds from other individuals - long after the original issuing organization raised capital.
Bonds usually have maturity dates (when the loan needs paid back).
